Rio Tinto (LON:RIO) edges ahead its investment case among London’s global base metals miners with an impressive set of 2016 results, including a surprise dividend hike and confirmation of a share buyback throughout 2017.
Clearly though, Rio does not intend to repeat the return of 70% of a year’s underlying earnings ($3.6bn) in the foreseeable future, after projecting free cash flow growth of $1bn a year till 2022.
And the tardy share price reaction in Australian trading—just 0.8% higher—and only somewhat better applause in London—already slipping off a 3.3% initial rise—also has an eye to increasing likelihood of a strike at the world’s biggest copper mine, Escondida, in Chile. The anxieties have placed a floor under price of the metal as it consolidates off January’s 18-month high, but a production delay (strike leaders suggest "practically zero” output) will be a setback.
The group realises that brutally slimmed-down production assets are already running at close to best capacity. That partly explains the three major growth projects in development for this year in bauxite, aluminium and copper. Furthermore, output of the latter saw the second fastest ramp in the year to end-Q4, up 20%. That acceleration came on the back of an 11% rise at Escondida in the quarter. But it was not sufficient to offset an overall Escondida decline of 12% in 2016.
So, a stoppage in Chile could make for an awkward start to an ambitious year for the group, during which it will need to manage expectations about production and cash flow generation, as the mineral price outlook suggests consolidation for the medium term. For instance, the forward curve of Nymex’s 62% China iron ore futures points to a price around $60/mt, down a quarter against the spot.
This year’s largesse to Rio shareholders may begin to look even more strategic if, as we suspect, the ‘extreme phase’ of global miners’ cost rationalisation and leverage reduction does indeed turn out to be over. Rio presented a net debt slashed by 30% with a justifiable flourish on Wednesday, but consensus forecasts point to a reduction of less than half that in 2017, at 12%.
Clearing industrial action cloud cover might encourage a sunnier share price reaction in the near term though. Rio’s 120% climb since January 2016 to date lags its closest match BHP Billiton (LON:BLT) by 17 percentage points. A year of firing on most cylinders, financially and operationally, suggests the disparity no longer makes sense.
Fundamentally too, Rio’s 2016 leaves it poised to benefit even if the pace of cyclical commodity recovery moderates significantly.
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